NEW YORK (Reuters) – The U.S. dollar extended gains and U.S. government debt prices fell on Monday on fears the Federal Reserve will hike interest rates sooner than expected after last week’s surprisingly strong jobs data.

The selling of bonds followed a steep sell-off on Friday after the U.S. Labor Department said employers cut far fewer jobs in May than had been forecast, sparking speculation that a recession might end this year and later spur higher rates.

June 3, 2009

China and the Global Pulp Market: 2005 through Summer 2008
Chinese pulp imports expanded at a very healthy 11% compound annual rate from 2004 to 2007. While certainly an impressive growth rate, it’s worth noting that the expansion came off a relatively small base, so China’s share of global demand remained relatively modest compared with other commodities like copper and iron ore.Meanwhile, global pulp prices increased dramatically over the period, a phenomenon less attributable to demand growth than to incipient supply constraints in major supplier geographies: Russian log export tariffs, an Indonesian logging ban, and a dramatic decline in North American lumber production (which curtailed residual wood chip availability). With these traditional supply sources increasingly constrained, global pulp prices reached a peak by the summer of 2008. Massive rents accrued to the low-cost sources of supply, particularly South American producers like Aracruz

China and the Global Pulp Market: Fall 2008 to Present
The tide turned dramatically against pulp producers in the fall of 2008 as economic troubles began to manifest around the globe. Newspaper and magazine circulation and page counts dropped, mail volumes declined, and plummeting consumer durable purchases meant fewer corrugated boxes were needed. Global pulp demand started to tail off accordingly, a situation further exacerbated by trade credit problems. Worldwide pulp shipments dropped 4% in September and 9% in October, while Chinese pulp imports fell 27% and 23% in September and October, respectively. Not surprisingly, global pulp inventories swelled, hammering prices around the world. Northern Bleached Softwood Kraft pulp (NBSK) delivered to China fell to $518 per ton by November, down from $745 per ton in July.

At this point, we began to see Chinese purchasing trends reverse: November imports rose 12% year over year, followed by a staggering 53% year-over-year increase in December. Much of this, we speculate, was inventory restocking following drawdowns in the previous months. China’s apparently healthy appetite for imported pulp continued into the new year, with January, February, and March imports posting 70%, 47%, and 90% gains over prior-year levels–far above what normal restocking activity might require…..

Inventory Building
To some extent, inventory building in excess of requirements seems to be taking place: Chinese buyers are taking advantage of low prices, a phenomenon apparent in many other raw materials. If this were the only factor at work, we could expect Chinese demand to collapse in the coming months, eliminating the lone support keeping pulp prices from falling further. Yet given the magnitude of the import growth, it seems unlikely that inventory building can explain the entire disconnect….

The Chinese central government appears to have played a role in promoting substitution. The PRC’s 11th Five Year Plan, issued in 2005 and covering the years 2006-10, included provisions to close down much of China’s nonwood pulp capacity as well as small capacity wood pulp mills. Yet given the fact that in the two years following Beijing’s edict (2006 and 2007), Chinese consumption of domestic pulp increased at a faster rate (8.1% annual rate) than imported pulp (5.5% annual rate), we speculate few closures actually occurred. With this unimpressive track record in mind, we should be careful not to overstate Beijing’s ability to exert control over local actors.

It seems reasonable to conclude that sky-high imported pulp prices explain paper producers’ previous unwillingness to follow Beijing’s marching orders. Interestingly, producers appear to have become more willing to accede to Beijing’s plans now that imported pulp prices have fallen so much. Simply put, we think imported pulp has reached a price (around $500-$550 per ton CIF) at which it can effectively crowd out lower-quality domestic pulp production–with or without government fiat. Interestingly, a similar dynamic seems to be at play in the Chinese steel industry, where producers have increasingly turned from lower-quality domestic iron ore supplies to higher-quality imports after the price of the latter had fallen sufficiently to promote substitution.

Consumers have not forgotten the pain of high oil prices in 2008, when a barrel of the black stuff peaked at $147. In rich countries commuters squealed especially, not only because of the expense—rich-world consumers found that they were forced to spend a larger, if still low, share of their income on transport—but also because of the volatility of the price and the sheer speed of the increases. As higher oil prices nudged up transport costs and energy bills, inflation began to rise. Carmakers were affected too, as demand for new vehicles slumped. The suddenness of the price rise left little room for consumers, companies or governments to adapt smoothly.n many poorer countries higher oil prices caused greater hardship. For oil-importers, at least, higher prices played havoc with government finances, cutting into budgets for other kinds of spending. For poorer consumers, the associated rise in food prices affected a larger slice of their spending, provoking social unrest in many countries. Along with the rise in the oil price, food prices have again been creeping upwards recently.

Many poorer countries would also be affected if rising oil prices hamper global trade. For economies that depend upon being within global supply chains, making or assembling goods that are then shipped to rich-world consumers, rising transport costs are particularly unwelcome. Given the vast numbers of people employed by export-oriented firms, from Cambodia to Bangladesh, any repatriation of production closer to final markets could prove painful. For some poorer countries, most obviously oil-exporters, rising commodity prices would be beneficial.